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EXECUTIVE SUMMARY
This paper is intended as a factual description of the issues arising as a result of the complexities of the international tax systems and their impact on life sciences businesses. It is not an attempt to judge practices that arouse public interest on both sides of the Atlantic.
he Organisation for Economic Co- operation and Development (OECD) Action Plan on Base Erosion and Profi t Shifting (BEPS) is designed to prevent multinational businesses achieving
non-taxation on profi ts or artifi cially shifting profi ts across borders to exploit lower corporate income tax rates.
The principle of national tax sovereignty allows individual countries to set their tax policy without consideration of the rates and tax policy set by other countries. This has led to a large variation in corporate income tax rates. There is a 27.5 percent spread between the lowest and highest corporate income tax rates in OECD countries and there is a 24 percent spread in effective corporate income tax rates between the top 20 life sciences companies.
These variations often compel companies to treat corporate income tax as a ‘cost’ to the business; minimising the corporate income tax liability increases post tax earnings.
This is particularly pronounced in the US where their system of worldwide taxation is coupled with one of the world’s highest corporate income tax rates. The current US tax law permits a deferral of taxation of overseas profi ts until repatriation, and the life sciences sector has been active in implementing corporate inversions in an attempt to achieve a permanent deferral on these profi ts. They also frequently push intellectual property exploitation rights into cost sharing arrangements with low tax jurisdictions. These practices are necessary for companies to achieve a competitive effective tax rate.
In Japan, on the other hand, tax planning is considered less culturally acceptable, despite the high domestic corporate income tax rate.
European life sciences companies are generally more restricted in their ability to shift profi ts across borders due to robust Controlled Foreign Corporation (CFC) laws, and place a relatively greater reliance upon R&D tax credits or tax incentive programmes that reward innovation such as royalty/patent boxes.
The potential impact of BEPS
The BEPS Action Plan tries to address the arbitrage between different tax rates and different interpretations of tax principles which arise as a result of tax sovereignty. The aim is to produce a revised set of guidelines to help eliminate non- taxation and ensure that profi ts are correctly
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allocated to the functions or activities that give rise to them. This will maintain the objective of minimising double taxation and reduce the unnecessary burden of compliance on tax payers. Life sciences companies will need to review their use of lower tax subsidiaries in the management and exploitation of intellectual property. Currently the management of intangible assets is focused on cost sharing and economic risk, whereas one likely impact of the BEPS Action Plan will require a closer alignment of actual ‘value generation’ (profi t) to ‘economic activity.’
For these reasons the proposals have the potential to signifi cantly impact the bottom line of a large number of life sciences companies by increasing their overall effective corporate income tax rate. Or, they may merely achieve a concentration of ‘substance’ in those jurisdictions offering the most competitive effective corporate income tax regime. Ultimately this could lead to a race to the bottom in terms of corporate income tax rates.
We recommend multinational life sciences companies should review their organisational structures and perform scenario planning to assess the likely impacts of the BEPS work- streams. In particular, focus should be given to how the existing structure would be viewed should information regarding the supply chain and taxes paid in-country be made available to the public.
BEPS
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